7. EQUITY VALUATION
DDM or CAPM valuation
No Dividend No DDM
CAPM:
RFB = rf + bFB * (rM – rf) = 2.67 + 1.77 * (7.32 –
2.67) = 10.90%
*We will use the yield on 10-year US Treasury bonds, because it’s very unlikely to
default. As of the time this paper is written, the risk-free rate is 2.67% (United
States Government Bonds, 2014). We will use 10 year average of S&P 500 Index as
expected market return, which has the value of 7.32% as of today (S&P 500 Index,
2014)
ROI: 8.33%
Overvalued
8. WEIGHTED AVERAGE COST OF CAPITAL
Cost of debt
Cost of debt (before tax) is usually the corporate bond rate of
company’s bond rating. Since Facebook currently has no bond, we will
assume that Facebook will receive an “A” bond rating from Standard
and Poors or Moody.
Cost of debt = Risk-free rate + Credit Spread = 2.67 + 0.52 = 3.19
(Credit spread using data from (Composite Bond Yields Table, 2014))
Current tax rate: I will use data from Facebook’s income statement in
2013
Tax rate = Taxes / Earning before Taxes = $1,254,000 / $2,754,000 =
48.71%
Cost of debt (after tax) = cost of debt (before tax) * (1 – Tax rate)
= 3.19 * (1- 48.71)= 1.64%
Cost of equity: we already calculate this in part III.5 as 10.90%
Weighted cost of capital. We use data from Facebook’s balance
sheet in 2013.
Debt percentage: $2,425,000 / $17,895,000 = 0.1355
Equity percentage: $15,470,000 / $17,895,000 = 0.8645
Weighted cost of capital = 0.1355 * 1.64% + 0.8645 * 10.90%
= 0.22% + 9.42% = 9.64%